Shares in Manolete Partners – the listed insolvency litigation funder – have tumbled by 20% in the wake of an attack on the firm on an investing website.
The website ShareProphets published a 17-page report on Friday from an anonymous author that heavily criticised the Manolete model and drew parallels with Burford Capital, which was subject to a similar assault last year.
The report began: “Just like Enron, Worldcom and recently Burford Capital, Manolete has enjoyed the advantage of the first mover at the beginning of deregulation.
“In the case of Manolete, the lifting of the Jackson reforms exemption across the insolvency litigation market has opened the doors for a marked path to growth.”
It claimed that the firm was “burning cash at a rate of knots that suggests the reported returns cannot be sustained with the present capital structure, even if its assessment of fair value prevails as accurate and reliable”.
Manolete’s shares closed last Thursday at 508p, only a week after publishing strong annual results. But they closed yesterday at 410p and have continued to fall today.
The report argued that Manolete’s current valuation “incorporates the ambitious assumption that the firm will achieve a 44% market share based on a grossly misleading report and overlooks the fast-approaching threat of new entrants who are well resourced and positioned to challenge the firm…
“Manolete will need to return to the market to raise capital if the growth in its marked litigation assets continues at the present rate, the along with a persistent operating cash outflow will provide the key catalysts for a rerating.”
The company put out a detailed 2,600-word rebuttal today, telling investors that “in the opinion of the board, the article contains a large number of false statements and is misleading”.
It rejected the suggestion that Manolete was “burning cash at a rate of knots”, pointing out that its annual results showed that the cash generated from completed cases exceeded all cash legal expenses on closed cases, all cash payments to insolvent estates and all company cash overheads.
While its cash overheads rose 48% over the year, it said this was mainly down to the increased salary costs of establishing its regional network of in-house solicitors, increasing capacity for handling cases.
“The significant point here being that the cash inflows from cases started before the regional network was established more than covered the overhead base of the much-expanded Manolete in-house regional team.
“The London and regional team have invested in a record 141 cases in FY20 and the cash income derived from those cases will be received in future reporting periods. As overheads will not require a further step-change for a significant time, the net cash generation prospects are attractive.”
There was, the statement continued, no basis for suggesting Manolete would need to issue new equity, saying it has yet to need its £20m revolving credit facility and that it would be “more than adequate to finance the business in the foreseeable future”.
On fair value, the board said: “Manolete’s long-established history of 257 realised cases over a period of 11 years of operation has not given rise to any material adverse losses in its financial statements over that entire period.”
It went on to dismiss the argument that Manolete was absorbing higher risk as it increased its case acceptance rate, saying the reasons it now took on 30% of cases, as opposed to 20% before listing, were that it was now not constrained by its balance sheet and lack of cash, and the regional team of lawyers gave it “unprecedented early access to cases, particularly those outside of London”, whereas previously it was approached more as a last resort.
The recently published report referred to by ShareProphets was written by Professor Peter Walton of Wolverhampton University, who estimated that the size of the insolvency litigation market has increased by 50% in the last four years to claims worth £1.5bn per annum – he came to this figure through extrapolating his findings.
It was commissioned by Manolete, with the support of the Insolvency Practitioners Association and Institute of Chartered Accountants in England and Wales.